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INSURANCE LIABILITIES

3 Months Ended

Mar. 31, 2020

10. Insurance Liabilities

Liability for Unpaid Losses and Loss Adjustment Expenses (Loss Reserves)

Loss reserves represent the accumulation of estimates of unpaid claims, including estimates for claims incurred but not reported and loss adjustment expenses, less applicable discount. We regularly review and update the methods used to determine loss reserve estimates. Any adjustments resulting from this review are reflected currently in pre-tax income, except to the extent such adjustment impacts a deferred gain under a retroactive reinsurance agreement, in which case the ceded portion would be amortized into pre-tax income in subsequent periods. Because these estimates are subject to the outcome of future events, changes in estimates are common given that loss trends vary and time is often required for changes in trends to be recognized and confirmed. Given the uncertainties around the impact from the COVID-19 crisis, including the significant global economic slowdown and general market decline, the full impact of COVID-19 and how it may ultimately impact the results of our insurance operations remains uncertain. In addition, in response to the crisis, new governmental, legislative and regulatory initiatives have been put in place and continue to be developed that could result in additional restrictions and requirements relating to our policies that may have a negative impact on our business operations. However, we have recorded our estimate of the ultimate liability for claims that have occurred as of the balance sheet date associated with COVID-19 which reflects our expectations given the current facts and circumstances. We will continue to monitor and review the impact. Reserve changes that increase previous estimates of ultimate cost are referred to as unfavorable or adverse development or reserve strengthening. Reserve changes that decrease previous estimates of ultimate cost are referred to as favorable development.

Our gross loss reserves before reinsurance and discount are net of contractual deductible recoverable amounts due from policyholders of approximately $12.3 billion and $12.2 billion at March 31, 2020 and December 31, 2019, respectively. These recoverable amounts are related to certain policies with high deductibles (in excess of high dollar amounts retained by the insured through self-insured retentions, deductibles, retrospective programs, or captive arrangements, each referred to generically as “deductibles”), primarily for U.S. commercial casualty business. With respect to the deductible portion of the claim, we manage and pay the entire claim on behalf of the insured and are reimbursed by the insured for the deductible portion of the claim. Thus, these recoverable amounts represent a credit exposure to us. At both March 31, 2020 and December 31, 2019, we held collateral of approximately $8.9 billion, for these deductible recoverable amounts, consisting primarily of letters of credit and funded trust agreements. Allowance for credit losses for the unsecured portion of these recoverable amounts was $14 million at March 31, 2020.

The following table presents the roll-forward of activity in Loss Reserves:

	Three Months Ended
	March 31,
(in millions)		2020		2019
Liability for unpaid loss and loss adjustment expenses, beginning of period	$	78,328	$	83,639
Reinsurance recoverable		(31,069)		(31,690)
Initial allowance upon CECL adoption		164		-
Net Liability for unpaid loss and loss adjustment expenses, beginning of period		47,423		51,949
Losses and loss adjustment expenses incurred:
Current year		4,111		4,297
Prior years, excluding discount and amortization of deferred gain		(1)		(15)
Prior years, discount charge (benefit)		76		497
Prior years, amortization of deferred gain on retroactive reinsurance^(a)		(75)		(86)
Total losses and loss adjustment expenses incurred		4,111		4,693
Losses and loss adjustment expenses paid:
Current year		(342)		(317)
Prior years		(4,351)		(5,639)
Total losses and loss adjustment expenses paid		(4,693)		(5,956)
Other changes:
Foreign exchange effect		(230)		216
Allowance for credit losses		-		-
Retroactive reinsurance adjustment (net of discount)^(b)		22		(190)
Total other changes		(208)		26
Liability for unpaid loss and loss adjustment expenses, end of period:
Net liability for unpaid losses and loss adjustment expenses		46,633		50,712
Reinsurance recoverable		31,114		31,784
Total	$	77,747	$	82,496

(a)Includes $8 million and $9 million for the retroactive reinsurance agreement with National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway Inc. (Berkshire), covering U.S. asbestos exposures for the three-month periods ended March 31, 2020 and 2019, respectively.(b)Includes benefit (charge) from change in discount on retroactive reinsurance in the amount of $72 million and $307 million for the three-month periods ended March 31, 2020 and 2019, respectively.On January 20, 2017, we entered into an adverse development reinsurance agreement with NICO, under which we transferred to NICO 80 percent of the reserve risk on substantially all of our U.S. Commercial long-tail exposures for accident years 2015 and prior. Under this agreement, we ceded to NICO 80 percent of the paid losses on subject business paid on or after January 1, 2016 in excess of $25 billion of net paid losses, up to an aggregate limit of $25 billion. At NICO’s 80 percent share, NICO’s limit of liability under the contract is $20 billion. We account for this transaction as retroactive reinsurance. We paid total consideration, including interest, of $10.2 billion. The consideration was placed into a collateral trust account as security for NICO’s claim payment obligations, and Berkshire has provided a parental guarantee to secure the obligations of NICO under the agreement. The total paid claims subject to the agreement as of March 31, 2020 were below the attachment point.

Discounting of Loss Reserves

At March 31, 2020 and December 31, 2019, the loss reserves reflect a net loss reserve discount of $1.6 billion and $1.5 billion, respectively, including tabular and non-tabular calculations based upon the following assumptions:

The discount for asbestos reserves has been fully amortized.

The tabular workers’ compensation discount is calculated based on a 3.5 percent interest rate and the mortality rate used in the 2007 U.S. Life Table.

The non-tabular workers’ compensation discount is calculated separately for companies domiciled in New York and Pennsylvania, and follows the statutory regulations (prescribed or permitted) for each state. For New York companies, the discount is based on a 5 percent interest rate and the companies’ own payout patterns. For the Pennsylvania companies, the statute specifies discount factors for accident years 2001 and prior, which are based on a 6 percent interest rate and an industry payout pattern. For accident years 2002 and subsequent, the discount is based on the payout patterns and investment yields of the companies.

In 2013 and in 2014, our Pennsylvania and Delaware regulators, respectively, approved use of a consistent discount rate (U.S. Treasury rate plus a liquidity premium) to all of our workers’ compensation reserves in our Pennsylvania-domiciled and Delaware domiciled companies, as well as our use of updated payout patterns specific to our primary and excess workers compensation portfolios. In 2020, these regulators also approved that the discount rate will be updated on an annual basis, with the next update being performed in the fourth quarter of 2020.

At March 31, 2020 and December 31, 2019, the discount consists of $593 million and $582 million of tabular discount, respectively, and $972 million and $967 million of non-tabular discount for workers’ compensation, respectively. During the three-month periods ended March 31, 2020 and 2019, the benefit (charge) from changes in discount of $(56) million and $(473) million, respectively, were recorded as part of the policyholder benefits and losses incurred in the Condensed Consolidated Statements of Income.

The following table presents the components of the loss reserve discount discussed above:

	March 31, 2020						December 31, 2019
	North						North
	America						America
	Commercial			Legacy			Commercial			Legacy
(in millions)	Insurance			Portfolio		Total	Insurance			Portfolio		Total
U.S. workers' compensation	$	2,087	$	657	$	2,744	$	2,134	$	666	$	2,800
Retroactive reinsurance		(1,179)		-		(1,179)		(1,251)		-		(1,251)
Total reserve discount^*	$	908	$	657	$	1,565	$	883	$	666	$	1,549

*Excludes $170 million and $172 million of discount related to certain long tail liabilities in the UK at March 31, 2020 and December 31, 2019, respectively.

The following table presents the net loss reserve discount benefit (charge):

Three Months Ended March 31,	2020						2019
	North						North
	America						America
	Commercial		Legacy				Commercial		Legacy
(in millions)	Insurance		Portfolio			Total	Insurance		Portfolio			Total
Current accident year	$	20	$	-	$	20	$	24	$	-	$	24
Accretion and other adjustments to prior year discount		(67)		(9)		(76)		(251)		(13)		(264)
Effect of interest rate changes		-		-		-		(167)		(66)		(233)
Net reserve discount benefit (charge)		(47)		(9)		(56)		(394)		(79)		(473)
Change in discount on loss reserves ceded under
retroactive reinsurance		72		-		72		307		-		307
Net change in total reserve discount^*	$	25	$	(9)	$	16	$	(87)	$	(79)	$	(166)

*Excludes $(2) million and $35 million discount related to certain long tail liabilities in the UK for the three-month periods ended March 31, 2020 and 2019, respectively.